Diana Clement: Homeowners may be in for an insurance shock

Policies set to shift from 'replacement' to 'set sum' values which holders will have to calculate for themselves

For some homeowners the change will mean a large increase in premiums. Photo / APN

Kiwis need to get a whole lot more interested in their house insurance or it will cost them dearly. You don't need to talk to many earthquake-affected Cantabrians before you come across a sorry tale.

What's more, our insurers are changing the nature of the house insurance policies they sell to us. No longer will we be covered for "replacement" if the house burns down or otherwise destroyed.

From renewal date this year, most people will find themselves covered for a set sum, which they have to work out for themselves. Get the number wrong and you could be left with a huge financial shortfall come claim time. Vero, State, NZI, AA and AMI have all indicated they will be moving to sum-insured policies.

It would be easy to point the finger at the insurers and assume they're doing this to rip us off. The decision, however, wasn't theirs. It has been led by re-insurers, who insure the insurers and without whom we would have no insurance companies.

For some homeowners, however, the change will mean large premium increases. Not because rates are going up, but because they were under-insured in the past.

One Whangaparoa homeowner found that out himself - albeit before any need for a claim.

"At the end of last year when my insurer sent out a reminder and an account for the next year's annual home and contents insurance, I made it a priority to look at and completely review my insurances."

He found that under his NZI Peace of Mind replacement policy, his home would not be rebuilt to the same specifications if it were destroyed.

"The home would only be built to the same design and floor area - but not the same spec. My home is very high-spec and has, for example, over $100,000 worth of 12mm American oak flooring in all rooms, copper piping and guttering, fibre-optic wiring in every room, marble bathrooms, central air-conditioning piped into every room, et cetera."

His insurer told him a total loss payout would be capped at what it viewed as "reasonable" to rebuild a home of the same floor area, but not necessarily to its actual value or specification. In short, he had a basic policy that would replace the home with bog-standard fixtures.

Eventually he hired an insurance broker who recommended he transfer to NZI's Distinction home policy, a sum-insured policy designed for high-specification houses.

The man paid $690 for a replacement certificate valuation (which is different from a market valuation and includes factors such as the cost of demolition), which showed he needed to cover the house for $200,000 more than he anticipated. The premium was hiked accordingly.

He wasn't happy at having to pay for a valuation. Taylor points out, however, it is the same as paying to have other valuable items valued.

Not everyone will need a valuation. Sum-insured insurance is common in Australia and Australian insurers offer quite in-depth online wizards using the "Cordell method", which can be found here.

NZI's Cordell wizard may use pictures and info graphics to help people understand some of the questions. It will be tailored to New Zealand's building conditions.

The wizard will take into account, for example, whether the home is a villa or a monolithic clad house and if the fixtures and fittings are standard or top-of-the-range designer models.

The new system will take time for Kiwis to get used to. We're not accustomed to having to work out what our homes are worth. There will no doubt be some very sad tales emerge in the early years from homeowners who failed to choose a high enough sum to insure.

People who have never glanced at their insurance policies should consider some of the Kafka-esque situations some Christchurch home owners have found themselves in. Many had never read their policies. Even if they had, the wording used in insurance policies sometimes has subtle meanings that only the experts understand fully.

For example, home owners in the Red Zone who couldn't rebuild on the same site found that their "replacement value" policies in fact only covered them for indemnity (replacement cost less depreciation).

"The issues of Red Zone repairs over total loss is a very vexed area and we have to treat each case on its merits," says Iain Opray, earthquake response manager for the Insurance and Savings Ombudsman. "In a simplistic way, an insurer's responsibility is to pay for damage and if it deems the damage to be reparable, then that is the extent of its liability." He adds that the insurer has no responsibility in respect of the land. That is covered by EQC.

The ombudsman's files on earthquake claims contain a tale of woe. One Canterbury home owner found that his 160sq m home was incorrectly listed on his policy as 130sq m. The insurance company had been charging premiums since 1996 on a house of 130sq m and despite a complaint to the ombudsman, the home owner was only paid the cost of replacing a 130sq m house.

In another case, an insurance company deemed it shouldn't be paying out for "temporary accommodation" on a tenant's contents insurance. Its argument was that because of the length of time it would take to rebuild the rental property the policy holder had lived in, the accommodation she had moved into wasn't deemed "temporary". The policy holder argued successfully that she would move back into the old property when it was rebuilt and as a result, received her temporary accommodation benefit.

The ombudsman's office heard another case where the homeowner got a temporary accommodation benefit from her insurance company following the September 2010 earthquake, but was denied a second temporary accommodation allowance after the February 2011 earthquake. The insurance company's argument, which the ombudsman upheld, was that the house was already uninhabitable come the February 2011 earthquake. Had she moved back in before the February 2011 earthquake, she would have been eligible for a second payout.

The length of temporary accommodation cover is an issue that also concerned the Whangaparoa reader.

"I argued that six months was totally not realistic. A council building permit can take three months and building an average home at least six to nine months by the time trades or a building company is found and booked, quotes have come in and the original site is cleared."

His original house build took 12 months. "Can you imagine how long it would take the insurance company, which has complete control over the replacement process?"

Taylor says the average house rebuild takes 36 to 40 weeks. Even so, there are homes in Christchurch that have still not been rebuilt nearly two years after the February 2011 earthquake.

Under-insurance in New Zealand is a significant problem, says Opray. "The progressive change by insurers from insuring homes on an open-ended replacement basis to a specified sum-insured will undoubtedly create problems for homeowners.

"It is important that home owners read the policies covering their home and contents to ensure they have an understanding of the cover provided and, importantly, what is not covered," he says.

Taylor adds: "We take a 'she'll be right' attitude. We think the worst that will happen is that the house will be broken into and the $1000 TV stolen. So it doesn't matter if we have $40,000 or $70,000 contents cover. People don't think about how much the lounge suite costs, or the kids' toys and clothes, or curtains and blinds."

The Whangaparoa reader also realised, when he did his review, that his contents insurance was inadequate. "When I sat down and started to value things, I realised my estimate was miles out, not to mention I had accumulated contents over the years like expensive original works of art."

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.